Pricing In Retailing Chapter 17 Dr. Pointer’s Notes
Mar 30, 2015
Pricing In Retailing
Chapter 17
Dr. Pointer’s Notes
Overview
Pricing is the value that is placed on something. That something is usually goods and service
Products must be priced in a way that both achieves profits and satisfies customers
Basic pricing Options
Discount orientation – low prices as competitive advantages
At the market orientation – uses average prices to offer solid value
Upscale orientation – using a prestigious image as competitive advantage
External Factors Affecting Retail Pricing
Consumers Governmental issues Manufacturers/wholesalers/
suppliers Current and potential competitors
Consumer Factors
Price elasticity of demand – Measures sensitivity of consumers to price changes.
A small change in prices results in a big change is quantity – very elastic
Change in prices does not result in significant change in quantity it is inelastic. Elasticity = ∆ Q/ ∆P
Consumer_2
Price sensitivity varies by market segment based on market orientation
1. Economic Consumers2. Status-oriented consumers3. Assortment oriented consumers4. Personalizing consumers5. Convenience oriented consumers
Government Issues Horizontal pricing fixing – parties within
the same level in channel agree to set prices
Vertical price fixing – when manufacturers or wholesalers seek to control the retail prices of their products
Price discrimination –occurs when retailers sell same product at different prices to different consumers under same conditions.
Robinson- Patman act bars price discrimination
Justifiable reasons to price discriminate
Products are physically different Retailers paying different prices
are not competitors Competition is not injured Price differences are due to
differences in costs Market conditions change
Government issues Minimum price laws- can not sell certain
items for less than costs Predatory pricing- seeks to reduce
competition by pricing products very low
Loss leaders - price products below costs to attract more store traffic
Unit pricing- must provide total price and price per a certain unit such as price per oz. or price per lb
Government issues Item price removal – some states ban this Price advertising – cannot advertising a
price reduction unless it has actually been done
Price matching- legal in many states Bait and switching – illegal practice of
advertising a low price but then try to switch customers to another product when they enter the store or say the product is not available.
Manuf, wholesalers and Other Suppliers
May have conflicts between manuf, wholesalers regarding the pricing of merchandise
Private label is increasing – selling against the brand
Gray market goods are sold by retailers and not liked by manufacturers
Competition and retail Pricing
Market pricing- many retailers are in market and consumers have many to chose from which makes prices of products very similar
Administered pricing- seeks to attract consumers based on uniqueness of offering rather than price
Factors Affecting Retail Price Strategy
Price objectives Broad price policy Price strategy Implementation of strategy Price adjustments
Pricing objectives
Sales or market share – market penetration strategy – seek big revenues by reducing prices
Profit objectives – market skimming strategy. Sets premium prices and attracts customers who are less price senstitive. Objective is recovery of cash quicker.
Examples of Specific pricing Objectives (Fig. 17-5)
Maintain a proper image Clear seasonal inventory Provide good customer service Encourage repeat business Match competitors prices Increase shopper traffic
Broad Price Policy Broad price policy a retailer
generates an integrated price plan with short and long run perspective
Price policy is integrated with target market, retail image, and other elements of retail mix
Example of policy: no competitors will have lower prices
Price Strategy
Demand Oriented –price set based on consumers desire
Cost Oriented – costs are calculated and profits are added to set price
Competition oriented – prices set to match competition
Demand Oriented
Use demand to estimate what consumers are willing to pay
Price- quality association – higher price the higher the quality
Prestige pricing – higher the price the better, consumers preferences
Cost Oriented
Adding a $ amount to costs to set price Markup pricing Markup – difference between
merchandise costs and selling priceExample: retailer cost for a shirt is $25 He sells shirt for $45 Markup - $45-25 = $20
Markup examples Continued
Markup percentage = price-cost/price (30%) markup desired $12.00 retailers costs What will the selling price be? .30 = X - $12.00/ X 12/1-.30= 12/.70 = $17.14 Retail selling price is $17.14
Markup examples Continued
Desire a 40% markup , if the candy retails for .79, what costs should a retailer pay for the candy
.79 (1-.40)= .79 (.60) = .474 see examples in text page 426
Markup
Initial markup Maintained markups Variable markup policy Direct product profitability
Competition oriented pricing
Use competitions prices ONLY as a guide
can price above, below or at same level as competition
Integrated approaches to pricing strategy
Must consider many factors such as 1. if price reduces will revenues
increase greatly2. Will a given price, allow a
traditional markup to be attained3. Can above market prices lead to
superior image
Implementation of Price Strategy Customary and variable pricing1. Customary pricing –sets price at one
level and seek to keep them at these levels
2. Everyday low pricing (EDLP) sell goods at consistently low prices
3. Variable pricing – change prices as costs vary
4. Yield management pricing – determines price that yields the greatest profits for a given period.
Implementation of Price Strategy
One price policy and flexible pricing
1. One price policy – charge all customers the same price
2. Flexible pricing – let consumers bargain over prices
3. Contingency pricing -
Implementation of Price Strategy Odd pricing- set prices below even dollar
amt, .49 .99. 1.99, 99.99
Leader pricing selling selected items at reduced price to
build store traffic Multiple –unit – 2 for .79 bundled pricing combines several
products Price lining- sell products at a limited
price range.
Price Adjustments
Price adjustments let retailer use price as an adaptive mechanism
1. markdowns 2. additional markups
3. employee discount Markdowns are taken because of
competition, seasonality, demand patterns, merchandise costs and pilferage.
Price Adjustments
Markdown percentage = Dollar markdown/net sales
Off-retail markdown percentage = original price – new price/original
price
Price Adjustments Markdown control
Timing markdowns 1. Early markdowns – may results in
selling out quicker than late markdowns 2. Staggered markdown – - automatic markdown plan 4. storewide clearance
Problem set
Please prepare the following problems from your text page 439
Questions 4,5,6,7 and 12